A windfall tax on renewable generators would be disproportionate and unfair, Cornwall Insight has warned.
The company looked at share price data from the London Stock Exchange since November 2021, to analyse the financial performance of Oil and Gas companies (O&G), large electricity generators (GenCos), and Listed Renewable Funds.
This data, it said, is the best representation of investor expectations and the profits experienced by firms. It illustrates that the different classes of company have seen substantially different scales of profit in the last 12 months.
For example:
- Share prices for O&G companies have climbed to 150% of what they were in November 2021
- Renewable funds peaked at 115% of their November 2021 price, but have since fallen back to the same level they sat at in early March 2022
- GenCos shares remained largely constant until Russia invaded Ukraine, after which there has been a strong correlation with the wider economy
This data shows that treating renewable generation companies and O&G companies as equivalent under a windfall tax regime would not be appropriate, according to Cornwall Insight.
“Whilst we cannot know for certain what is going on without a forensic examination of each and every project in the market, this broad scale analysis does allow us to pose some educated hypotheses,” said Dr Matthew Chadwick, lead research analyst at Cornwall Insight.
“These trends likely reflect the underlying sensitivities of different business models to interest rates, and to commodity prices for their place in the energy value chain.”
The analysis follows rumours that chancellor Jeremy Hunt is set to expand and extend the windfall tax within his Autumn Budget tomorrow (17 November).
First unveiled in May 2022, the windfall tax – officially called the Energy Profits Levy – of O&G companies was brought in by then chancellor Rishi Sunak, at a rate of 25%. This was designed to help pay for a range of support measures for energy customers, including the Energy Price Guarantee.
At the time, the government predicted that tax would the raise around £5 billion in its first 12 months.
However, it was criticised by many for its inclusion of an Investment Allowance, which meant companies could save 91p for every £1 they invest. This nearly doubled the tax relief available, ensuring the more a company invests, the less tax they will pay.
This was perceived as a significant loophole, and was further criticised after it emerged that Shell paid no windfall tax on its £8.2 billion (US$9.5 billion) profit in Q3 2022, and bp paid only a minimal amount on its £7.1 billion (US$8.2 billion) Q3 profit.
Soon after the initial windfall tax was announced, rumours emerged that suggested it could be expanded to cover energy generators more broadly. This was roundly condemned by the renewables sector, with Energy UK at the time saying such a tax would risk future investment into energy infrastructure, impacting the transition to net zero and prolonging the UK’s reliance on volatile international gas.
While then-Prime Minister Boris Johnson quashed the suggestion at the time, two Prime Ministers down the road the rumours have once again raised their head under Sunak’s premiership.
Reports in a number of publications have suggested that the tax will be increased from 25% to 30% – with the Guardian placing it higher, at a rate of 40% on the “excess returns” of electricity generation companies, and 35% on O&G companies – and extended to 2028.
Given the differences in how renewable and O&G companies operate however, the tax would most likely disproportionately impact the clean energy developers and generators.
“Renewables listed funds are very sensitive to rising interest rates in the UK, as they heavily impact discount rates for component project valuations, O&G and large electricity generator companies on the other hand are more internationally diverse, with a wide range of exposure to discount rates, meaning inflation is less of a concern,” explained Chadwick.
Additionally, the energy buying strategies of renewable companies often rely on forward trading or hedging – with many companies locking in prices years in advance in an effort to reduce exposure to power price volatility.
“This may explain why we did not see a steeper climb in share prices beyond August, as large volumes of forward hedging in early-to mid-summer while prices climbed, saw them miss out on the super peak thereafter,” said Chadwick.
“O&G however, trade in the source commodity driving the whole energy value chain – gas – and have therefore been able to forward sell under ever increasing price levels since the end of 2021.”
For example, solar company Foresight’s portfolio was made up of 74% fixed contracted revenue, and 26% merchant risk as of the end of 2021. Therefore, there is a limit to how much it can take advantage of surging power prices, whilst O&G companies are swept along with them.
With the reemergence of windfall tax rumours, concern has once again grown in the renewables sector as to the potential impact on investor confidence, potentially slowing the sector’s expansion.
“This analysis is also instructive because we can view Renewable Listed Funds as a representative sample of the broader renewable project world, certainly for onshore wind and solar,” said Chadwick.
“If this is true, then it would be rash to assume that there are excessive windfalls to tax in this part of the market. And, if so, then the damage that undertaking such measures could have on investor confidence, and ultimately the increased risk premia on future investments in the medium- to long-term could exceed the benefits that a windfall tax might reap in the short term.”
Hunt is expected to deliver the Autumn Statement tomorrow (17 November), while there is no set time, this is expected to take place at around 12:30.
